Question

In the following question, I was able to calculate (a) regrading the sales, I need to understand how we get to

the other answers on this. Please.

15. Integrating Problem: The research department of the Corn Flakes Corporation (CFC) estimated the following regression for the demand of the cornflakes it sells: QX=1.0-2.0PX+1.5I+0.8PY-3.0M+1.0A where QX=sales of CFC cornflakes, in millions of 10 ounce boxes per year, PX= the price of CFC cornflakes, in dollars per 10 ounce box, I= personal disposable income, in trillions of dollars per year, PY= price of competitive brand of cornflakes, in dollars per 10 ounce box, PM= price of milk, in dollars per quart A=advertising expenditures of CFC cornflakes, in the hundreds of thousands of dollars p er year, This year PX=$2, I=$4, PY=$2.50, PM=$1, and A=$2.

a.    Calculate the sales of CFC cornflakes this year

Qx=1.0-2.0Px+1.5I+0.8Py-3.0Pm+1.0A

Qx=1.0-2.0(2)+1.5(4)+0.8(2.50)-3.0(1)+1.0(2)

Qx=1.0-4+6+2-3.0+2

Qx=4

4 million

b.    Calculate the elasticity of sales with respect to each variable in the demand function

Ep=-2(2/4)=-1

Ei=1.5(4/4)=1.5

Exy=0.8(2.5/4)=0.5

Exm=-3(1/4)=-0.75

Ea=1(2/4)=0.5

Elasticity of sales=0.5

c.    Estimate the level of sales next year if CFC reduces PX by 10% and increases advertising by 20%, I rises by 5%, PY is reduced by 10% and PM is unchanged

Q’x=Qx+Qx(DPx/Px)Ep+Qx(DI/I)Ei+Qx(DPy/Py)Exy+Qx(DPm/Pm)Exm+Qx(DA/A)Ea

Q’x=4+4(-10%)(-1)+4(5%)(1.5)+4(-10%)(0.5)+4(0%)(-0.75)+4(20%)(0.5)

Q’x=4+4(-0.1)(-1)+4(0.05)(1.5)+4(-0.1)(0.5)+4(0)(-0.75)+4(0.2)(0.5)

Q’x=4.9

4.9 million

d.    By how much should CFC change its advertising if it wants its sales to be 30% higher than this year?

They should increase adverstising by 35% to see a 30% sales increase next year, a 5.2.

 

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